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Alphabet, Inc. Earnings Highlight Powerful Momentum

By Daniel Sparks - Apr 24, 2018 at 3:43PM

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Alphabet's strong growth isn't slowing down, and management is as optimistic as ever about the growth opportunities that lie ahead.

Alphabet's (GOOGL 2.63%) (GOOG 2.68%) trend of strong growth continued in the company's first quarter, with revenue rising 26% year over year, faster than the online search company's 24% growth in its third and fourth quarters of 2017. "Our ongoing strong revenue growth reflects our momentum globally," said Alphabet CFO Ruth Porat about the results.

Unsurprisingly, Alphabet's 26% year-over-year increase in its first-quarter Google advertising properties revenue was the main growth driver for the period. But there were other important growth catalysts during the quarter, too.

People in suits walking into Google's headquarters entrance.

Image source: Alphabet.

Where Alphabet's growth is coming from

To get a better idea of the drivers behind Alphabet's strong revenue growth, here's a breakdown of each segment's revenue compared to the year-ago period.

Segment

Q1 2018

Q1 2017

Year-Over-Year Change

Google properties

$22 billion

$17.4 billion

26.4%

Google network members' properties

$4.6 billion

$4 billion

16.4%

Google other

$4.4 billion

$3.2 billion

35.8%

Other bets

$150 million

$132 million

13.6%

Data source: Alphabet first-quarter 2018 earnings release.

Alphabet investors should always be primarily concerned with Google advertising revenue growth, given its outsize importance to Alphabet's overall business. Derived from both Google properties (often referred to as "sites" revenue by management) and Google network members' properties, both segments are importantly seeing double-digit revenue growth.

In Alphabet's first-quarter results, Google properties revenue growth was particularly strong. Management cited "combined benefits of innovation and secular growth in mobile search" as the key drivers for sites revenue growth. Growth in network advertising revenue was primarily fueled by Alphabet's programmatic business, or automated ad buying in an auction-based format.

Google other revenue, or revenue from cloud, hardware, and the Android app store, saw very strong growth, rising 36% year over year. Notably, the segment's $1.2 billion increase in revenue over the year-ago period was greater than the $0.6 billion of revenue growth in network revenue during the same time frame. So, Alphabet's Google other business is now significantly more important to the company's growth story than network revenue. Management said all three of the segment's main components -- cloud, hardware, and the Android app store -- helped drive this growth.

More robust growth ahead

Investors should be encouraged by management's optimistic outlook. "We have a clear set of exciting opportunities ahead, and our strong growth enables us to invest in them with confidence," said Porat in Alphabet's first-quarter earnings press release.

Porat expanded on Alphabet's upbeat expectations in the company's earnings call, calling its opportunities for further revenue growth "quite extraordinary..." Some of the specific areas where Alphabet plans to continue investing heavily are hiring, research and development, data centers, network capacity, compute capacity, machine learning, cloud, Google Assistant, and hardware.

Of these investment areas, Porat said two of the newer markets where Alphabet predicts "extraordinary upside" are cloud computing and hardware.

Alphabet's impressive growth story is far from over.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy.

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